One Metric To Rule Them All: intu properties plc (LON:INTU)

Simply Wall St
July 25, 2018

intu properties plc is a UK£2.40b
mid-cap,
real estate investment trust (REIT) based in London, United Kingdom.
REITs are basically a portfolio of income-producing real estate investments, which are owned and operated by management of that trust company. They have to meet certain requirements in order to become a REIT, meaning they should be analyzed a different way.
Below, I’ll look at a few important metrics to keep in mind as part of your research on INTU.

REIT investors should be familiar with the term Fund from Operations (FFO) – a REIT’s main source of cash flow from its day-to-day business activities. FFO is a higher quality measure of earnings because it takes out the impact of non-recurring sales and non-cash items such as depreciation. These items can distort the bottom line and not necessarily reflective of INTU’s daily operations.
For INTU, its FFO of UK£140.90m makes up 33.04% of its gross profit,
which means over a third of its earnings are high-quality and recurring.

LSE:INTU Historical Debt July 25th 18

INTU’s financial stability can be gauged by seeing how much its FFO generated each year can cover its total amount of debt. The higher the coverage, the less risky INTU is, broadly speaking, to have debt on its books. The metric I’ll be using, FFO-to-debt, also estimates the time it will take for the company to repay its debt with its FFO.
With a ratio of 2.64%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take INTU
37.94 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.

I also look at INTU’s interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it’s better to use FFO divided by net interest.
With an interest coverage ratio of 0.76x, INTU is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.

In terms of valuing INTU, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks.
INTU’s price-to-FFO is
17.25x, compared to the long-term industry average of 16.5x, meaning that it is
fairly valued.

Next Steps:

As a REIT, intu properties offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in INTU, I highly recommend taking a look at other aspects of the stock to consider:

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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